Investors Always Think They’re Getting Ripped Off. Here’s Why They’re Right

Early in January in a Chicago hotel, Campbell Harvey gave a rip-snorting presidential address to the American Finance Association, the world’s leading society for research on financial economics. To get published in journals, he said, there’s a powerful temptation to torture the data until it confesses—that is, to conduct round after round of tests in search of a finding that can be claimed to be statistically significant. Said Harvey, a professor at Duke University’s Fuqua School of Business: “Unfortunately, our standard testing methods are often ill-equipped to answer the questions that we pose.” He exhorted the group: “We are not salespeople. We are scientists!”

The problems Harvey identified in academia are as bad or worse in the investing world. Mass-market products such as exchange-traded funds are being concocted using the same flawed statistical techniques you find in scholarly journals. Most of the empirical research in finance is likely false, Harvey wrote in a paper with a Duke colleague, Yan Liu, in 2014. “This implies that half the financial products (promising outperformance) that companies are selling to clients are false.”